Darden's Dividends Are a Delectable Dessert

Hunger pangs need not be present for you to want a bite of Darden Restaurants (DRI). Darden is the world's largest full-service restaurant company. It owns and operates more than 1,900 restaurants in North America. The company is cooking in more ways than one, making this is a good time to add Darden's stock to your portfolio's menu.

Darden's two best-known brands are Red Lobster, which serves seafood, and Olive Garden, the casual Italian chain. In addition, the company operates LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52 and Eddie V's. In total, Darden serves more than 400 million meals a year.

Last week, the company released its third-quarter results, and they were strong. Profits went from $151.7 million, or $1.08 a share, in the year-ago period to $164.1 million, or $1.25 per share, an 8% jump. Sales went up 9%, from $19.8 billion to $21.6 billion. According to a survey by FactSet Research, Wall Street expected earnings of $1.24 per share on revenue of $2.15 billion. The company said it expects fiscal 2012 total sales growth of between 7.0% and 7.5%, and diluted net earnings per share from continuing operations in the range of 4% to 7%.

The stock is also providing a tasty dessert in the form of dividends. In the calendar years 2007 to 2011, dividends were $0.59, $0.76, $0.90, $1.14 and $1.50, respectively. Two dividends have been paid so far in calendar 2012, totaling $0.86. The past several years have seen dividends increased in the last two quarters of the calendar year, and we may see the pattern continue this year. Even if they are not increased this year and kept at their current level, dividends will have gone up in 2012 as compared to the previous year. The current yield is 3.31%.

I analyze potential investment opportunities using strategies I created from the writings of well-known Wall Street gurus, and one of these, the one based on James P. O'Shaughnessy's investment approach, is very positive on Darden. It looks at market cap, and favors Darden's large cap of $6.7 billion. It also likes that EPS have increased in each of the past five years. Also in the company's favor is a price-to-sales ratio of 0.84. This is a way to measure which growth stocks are cheap to buy, and the maximum P/S is 1.5; Darden's P/S is way below this ceiling.

The strategy takes all the stocks that pass the previous three tests and then finds the top 50 of them based on their relative strength, which gauges how well a stock has performed against all other publicly traded stocks during the past year. A relative strength of 77 places Darden in this top-50 cohort.

I also use a strategy modeled after Warren Buffett's approach. Darden passes all the hurdles of this strategy but one. The company gets good grades for being a leader in its industry, earnings predictability -- they have increased in each of the past nine years -- return on equity (23.0%) and positive cash flow per share. Where it falters is in the strategy's analysis of an investor's expected annual rate of return over the next decade. The strategy prefers 15% or more, while it projects Darden's return will be 12.9%. If the stock price were a bit lower, Darden would earn a strong recommendation from the Buffett strategy as well as the O'Shaughnessy one.

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